Background on company

Baking on Main (Pty) Ltd (hereafter referred to as BOM) is a bakery and deli, owned by Jahangir on Main Road Claremont.They offer three product lines: baked goods, a selection of cured meats, and cheeses.BOM has always been known for good quality products, and has a large number of regulars.

They rent a small building that has three (3) specific sections namely the kitchen, the storage area and the shop front. The "kitchen" is where all the baking and preparing of the cheese and cured meats happens.The "storage" area is a cool room with no windows and is used for the curing of meats and storing of cheeses.The "shop front" is the area where their goods are displayed and customers can come in and buy any of the products.

Due to having other work commitments, Jahangir has employed you to take over the management of the bakery/deli.Jahangir's friend Alison, who runs a coffee roaster chain approached Jahangir on the day you were hired to ask if she could rent part of the shop and to have a coffee stand. Jahangir has given you the following information regarding the current operations.

Product information

Below is the product information for the month of May 2021, which is uncompleted due to Jahangir working on other projects:

Notes

Total

(R)

Baked goods

(R)

Cheeses

(R)

Cured-meats

(R)

Sales

420 000

115 000

125 000

180 000

Advertising income

1

20 000

Direct material costs

(215000)

(60000)

(55000)

(100000)

Variable indirect materials

(16000)

(5000)

(3000)

(8000)

Labour costs

-Salaries

-Wages

2

(66000)

(7000)

Other Fixed costs

-Maintenance

-Insurance

-Rent

3

(10000)

(4000)

(42 000)

Electricity

4

(29700)

Allocation of overheads

5

(40113)

(43601)

(62 786)

Profit per type of good

9 887

23 399

9 214

Profit in total (including advertising)

50 300

Usage of space

Sqm

Sqm

Sqm

Shop front

6

20

10

5

5

Note 1: Advertising income

The bakery/deli earns money from allowing businesses to post advertising posters on the shop windows and in the store.None of the advertisers sell competing products so this is just extra income for the shop.

Note 2: Staff

There are four (4) permanent staff and one (1) casual staff member which comprise the following:

The manager (you) earning R25000 a month, two (2) bakers earning R14000 a month, one (1) Deli assistant earning R13 000 and one (1) Cashier who is paid R35 an hour and only paid per hour worked.

Note 3: Rental of sections

Kitchen

Storage

Shop front

Size in square meters (Sqm)

25

15

20

The current rental is R700 per sqm[1].

Note 4: Electricity

BOM has a contract to pay R15 000 per month as well as a portion that has been found grows in line with revenue at R0.035 per Rand of Sales.

Note 5: Allocation of overheads

During the month, overheads were allocated by taking all costs other than materials and allocating them based on sales in Rand terms.

Note 6: Shop front space

Currently the store frontage and sales meet the customers' demand.The baked goods takes up a large space as the products are significantly larger (i.e. a loaf of bread vs piece of cheese) and baked goods are not easily stacked on each other.If space is taken away from any of the products, then the sales of that type of product will reduce in proportion to the amount of space lost (i.e. to reduce the bakery space they would stop producing a product i.e. chocolate croissants, and thus lose those sales).This space can be divided amongst the various products in any way.

Other information

All goods made are sold on the day they are finished (i.e. there are no opening or closing balances).

The store is always opened for eight (8) hours a day for 25 days of the month.

Proposal from Alison

Alison has asked if she could rent a portion of the store to open a coffee station.She needs about six (6) sqm of space of the shop front.She is offering to pay R25000 a month for that space, and she will pay for any electrical and other costs associated with running her operation.

Adjusted proposal

Jahangir has given some thought to Alison's proposal and has come up with an alternative idea which he would implement now in June, to make space for Alison's coffee stand.

The current storage area is however three (3) sqm's bigger than is required.Changing the storage area will involve breaking down walls.It the walls are broken down this means BOM will have to close for half the month of June.Jahangir has agreed that Alison will only need to pay rent for half the month. The cost of breaking down and re-building the walls will be R65000. Jahangir had a survey done at a cost of R20000 to determine the effect of coffee on his sales.

Existing product lines

Although he may have to give up a product line or lines to gain the extra three (3) sqm needed (3 sqm of the store room and 3 sqm of one of the product lines), it was found that if coffee was sold in the store, the remaining product sales would increase in the baked good department by 15%, cheese 5% and cured meats 5%.

Labour

May was a record month of sales and staff struggled to keep up with demand. They were at their limit in terms of how much they were doing within a day.If sales go above R420000, Jahangir will need to hire another casual worker for 4 hours a day to help with packing the stock on the floor and the new casual worker will be paid R25 an hour.

You can assume the same amount of sales for May (R420000) would have happened in June and July.

REQUIRED:

PART 1(12 marks)

(a)Calculate the total contribution for baked goods. You can assume that the labour costs cannot be linked to any product line and can be ignored in this calculation.The variable component of electricity can be linked to each product line given the information in note 4. (3 marks)

(b)Calculate the total fixed costs for May 2021 which should be used in the calculation of the break-even point for Baking on Main. (State the handling of Advertising income clearly.)(3 marks)

(c)Given that square metres are a limited factor as Alison wants to rent part of the shop which at this stage is fully utilized with the current operations. Discuss the way of thinking as to which product line of Baking on Main (Baked goods, Cheese or Cured-meats) should give the 6 square metres to Allison for her coffee station (no calculations required and assume that the 3 sqm of the store room is not an option at this stage).(3 marks)

(d)Assume that the contribution for the Baked goods section for May is R45 975.What is the relevant cost (lost contribution versus Allison's rental income) implications if Baked goods has to give 6sqm of their space to Allison for her coffee station?She has offered R25 000 per month for her 6 sqm coffee station space.(3 marks)

PART 2(25 marks)

The relevant costs of the adjusted proposal (to make space for Alison's coffee stand, 3sqm of the store room and 3sqm of the baked goods section), for the month of June and July should be evaluated.You are required to DISCUSS each statement in terms of relevant costing principles. Give detailed reasons whether the statement is correct or incorrect.

(a)Rental received from Allison for June is a relevant inflow of R12 500.(1 mark)

(b)Lost contribution for June in terms of the three divisions (baked goods, cheese and cured-meats) will be an outflow and is calculated as follows: R6 546 + R19 768 + R3 986 = R30 300.(2 marks)

(c)Assume the total contribution for the baked goods for May is R45 975.The lost contribution for baked goods for June is a relevant outflow of R6 896. (4 marks)

(d)Additional sales (15% extra on baked goods) for June will be a relevant inflow calculated as follows: {(115 000*1.15)/2} * 0.7(4 marks)

(e)Additional sales for cured meats for July are a relevant inflow and is calculated as follows: (R180 000 * 1.05) = R189 000(2 marks)

(f)The wage of the cashier (note 2) is a relevant inflow for June and the amount is R3 500.

(2 marks)

(g)The costs for the breaking down and the rebuilding of the wall and for the survey is irrelevant for the decision as both costs are sunk costs.(2 marks)

(h)The fixed part of electricity (R15 000) is irrelevant for June.(1 mark)

(i)There should be a part of overheads allocated to Allision which should be shown as a relevant inflow in terms of the relevant costs for June and July.(1 mark)

(j)The savings in terms of the permanent staff (4 employees) should be shown as in inflow as the Bakery is closed for first part of June.(1 mark)

(k)List three qualitative issues that you should concern before signing the final contract with Allison.(3 marks)

LOGIC AND NEAT PRESENTATION(2 marks)

[1] a unit of area measurement equal to a square measuring one meter on each side.²,